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Fool on the Street: Healthy Heinz

Apparently, selling health is healthy for business.

We Fools like to snoop on what managers are telling analysts from time to time. When I had the chance to do exactly that during H.J. Heinz's (NYSE:HNZ) presentation to the Consumer Analyst Group of N.Y., I jumped at the chance.

More of the same (thankfully)Not surprisingly, the theme of the conference call was the same that it's been since last summer, when a grand restructuring plan was unveiled thanks to the strong arm of activist shareholder Nelson Peltz.

The priorities at the time:

Cut costs.

Boost conventional marketing.

Repurchase stock and boost dividends.

Call it the slow and simple strategy. And like Heinz's famous ketchup, it had investors panting with anticipation. They were rewarded late last year, when operating income improved by double digits.

On Monday, CEO Bill Johnson told analysts to expect more of the same. For example, Johnson said that trade deals, which were a sticking point for Peltz, will come down from 18.1% of sales last year to 17.2% of sales this year.

That, in turn, will juice marketing spending, Johnson said. Plans call for a 20%, or $60 million, increase in funding for consumer pitches aimed at creating distance between Heinz brands and those offered by competitors like ConAgra Foods(NYSE:CAG) and Campbell Soup(NYSE:CPB).

Meanwhile, Johnson told his audience that existing pitches were working. For example, in Australia and New Zealand, Heinz's campaigns have been so successful that new products -- as in, foods launched within the prior 18 months -- now account for between 10% and 15% of total sales.

Hooray for health!But the condiment king believes it can do even better. How? By focusing on health and taste, which Johnson says is nothing new:

"Heinz has always been at the vanguard of health and wellness since H.J. pioneered the Pure Food and Drug Act in 1906. The clear health and wellness profile of our business has long been taken for granted."

Perhaps, Bill, that's because that red stuff you sell is best known for accompanying big, juicy burgers?

Nevertheless, Johnson has a point. Heinz actively markets its Weight Watchers brands, for example. And if he and his team hope to add growth from overseas markets like China and India, they'll need a lot more than the next great low-carb wonder. Could it be time to get the researchers onto the hamster wheel?

Going global in a familiar styleApparently, they're already running. Johnson told analysts that his team is working on 200 new products for fiscal 2008, up from 100 this year. But organic innovation isn't the most important factor in going global.

"Another key to growth is building scale in the markets and categories where we have strong brands," Johnson said. That may be true, but it's a risk. Heinz has been hurt badly by poor capital allocation in acquisitions in the past.

Johnson, however, preferred to focus on Heinz's successes. "Five of our 10 largest brands have been acquired since 2000," he said. Perhaps that's why he still believes that the best approach to growing the business in emerging markets is through acquiring leaders.

For now, he's right. Russia, Latin America, Poland, India, China, and Indonesia together are on track to produce 35% of Heinz's sales growth during fiscal 2007.

Still a good deal for investorsSo, risks from acquisitions and product development remain as they ever have. But Johnson seems to think his team is well positioned to overcome any roadblocks.

For example, when third-quarter results are released later this week, Johnson told analysts to expect 5% growth on the top line, 9% growth on the operating income line, and 30% growth in per-share earnings. That's confidence.

In the meantime, investors waiting for outsized returns can be assured by one of those oh-before-I-forget comments Johnson threw in before opening the call to Q&A. "Equally important for large income shareholders is our plan to maintain a dividend payout ratio of around 60%, which we first achieved with July's 17% increase last year."

I'll say. Don't make us wait for that, Bill.

H.J. Heinz is an Income Investor pick. Click here to get access to get 30 days of free access to the entire portfolio, which is beating the market by more than 9%.

Fool contributor Tim Beyers, who is ranked 1,337 out of more than 23,200 in our Motley Fool CAPS investor intelligence database, calls Heinz ketchup the magic food. His kids have it with almost every meal. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. All of his portfolio holdings can be found at Tim's Fool profile. His thoughts on dividend stocks, Foolishness, and investing in general may be found in his blog. The Motley Fool's disclosure policy is good for a healthy heart.

Author

Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment. Find him online at timbeyers.me or send email to tbeyers@foolcontractors.com. For more insights, follow Tim on Twitter.